Housing Allowance - Who Qualifies?

It depends who you are

The IRS housing allowance benefit can result in significant tax savings for some ministry employees. Only those ministerial staff members who are licensed, ordained, or commissioned are eligible for the housing allowance benefits. Learn the IRS definition of a “minister for tax purposes" here. A housing allowance must:

  • Be compensation for ministerial services.
  • Not exceed the minister’s reasonable compensation.
  • Be substantiated by actual expenses. If not, all or part of the housing allowance should be included in taxable income.

A housing allowance is available to ministers who own or rent a home, or live in a church-owned parsonage. Ministers can exclude the lowest of the following:

  • The housing allowance amount designated by the church;
  • Actual housing expenses, actual rental expenses, actual housing expenses paid by the church (including utilities, furnishings, repairs, and improvements); or
  • The fair rental value of the home (furnished, including utilities).

If a housing allowance exceeds the minister’s actual housing expenses and fair rental value of a home, the “excess” housing allowance must be reported as wages for federal income tax purposes. Ministers can exclude some or all of their designated housing allowance from their taxable income for federal income tax purposes. However, a housing allowance is always considered taxable income for Social Security and Medicare taxes. Check with a ministry tax specialist to see which expenses might count as “housing expenses.”

Handling housing income for non-ministerial staff

If you’ve determined that an employee does not meet the IRS definition of minister, treat any housing allowance offered to that employee as regular wages. Consequently, the ministry should include the housing allowance as regular wages with each paycheck and withhold the appropriate taxes. If you’d like to read the four other tips in this series, download Payroll and the Church: Answers to 5 Common Questions from MinistryWorks.

The information provided in this document is intended to be helpful, but it does not constitute legal advice and is not a substitute for the advice from a licensed attorney in your area. Please consult your attorney when creating, reviewing, or revising policies and procedures.

You could claim up to $33,000/employee with the
Employee Retention Credit.

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